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BACKERS REQUIRE MORE FLEXIBILITY BEFORE INCREASING ENERGY INVESTMENT

More efficient power an unrealised possibility

HIGH initial costs and a lack of long-term investment mechanisms have prevented energy-efficient combined heat and power (CHP) technology from being used to its full potential in Slovakia, industry insiders say.
In a standard condensing power station, electricity is produced with a maximum of 34 per cent efficiency; the rest of the energy is wasted. With CHP, also known as cogeneration, the heat is used to produce either super-heated steam or hot water, which can then be used for industrial processes or for domestic heating and hot water. The steam can also be used to drive additional turbines to produce more electricity.
By applying modern technology to common heat and power production, CHP can reach efficiency levels of nearly 90 per cent, bringing clear benefits to the environment because of reduced emissions of carbon dioxide and other greenhouse gasses.

HIGH initial costs and a lack of long-term investment mechanisms have prevented energy-efficient combined heat and power (CHP) technology from being used to its full potential in Slovakia, industry insiders say.

In a standard condensing power station, electricity is produced with a maximum of 34 per cent efficiency; the rest of the energy is wasted. With CHP, also known as cogeneration, the heat is used to produce either super-heated steam or hot water, which can then be used for industrial processes or for domestic heating and hot water. The steam can also be used to drive additional turbines to produce more electricity.

By applying modern technology to common heat and power production, CHP can reach efficiency levels of nearly 90 per cent, bringing clear benefits to the environment because of reduced emissions of carbon dioxide and other greenhouse gasses.

International concerns about nuclear-power generation and the pending decommissioning of the Bohunice nuclear power plant - one of two in the country - have created a need for Slovakia to find ways of reducing its dependence on fossil fuels, mainly in the form of gas piped in from Russia.

A World Bank report released in 2001 describes the Slovak Energy Sector as facing "numerous critical questions involving the appropriate future role of nuclear power and the political possibility of moving prices for electricity and gas toward full marginal cost."

At present, energy use in Slovakia is widely inefficient, mainly due to historical factors. During the communist period, the price of energy was artificially low and energy efficiency in housing construction and manufacturing was not a major concern.

While modern housing in Slovakia is more energy efficient, most of the country's houses and blocks of flats are more than 40 years old. Some government grants have been made available to improve insulation, but energy experts say Slovakia must seek more efficient use of its energy output.

CHP can provide at least part of the solution to the problem, experts say. However, there is a drawback to the technology: The start-up costs for projects are higher so the payback time is longer.

Also, because of the long-term nature of the investment, it is essential to ensure that there are future markets for the heat and electricity produced. As market conditions change, blocks of flats that have contracted for hot water from a local heat and power plant may find it more cost-effective to invest in local boilers.

Experts say it is therefore extremely important to carry out comprehensive market research, and to size resulting projects accordingly.

"The main financial risk of projects in the operating phase is the decrease of usable cashflow under the planned volume, either due to an increase in fuel prices on the input side or due to unrealistic sales assessments, disconnecting of the customers, their inability or refusal to pay, inadequate price regulation, or opening of the electricity market on the output side," said Vladimír Vacho of Prvá Komunálna Banka.

A large CHP plant can cost hundreds of millions of euro, but current regulated heat and power prices do not allow enough room for manoeuvre when setting up investment projects, according to industry professionals. For example heat producers are restricted to profits of Sk25 per gigajoule (0.65 euro per GJ) of heat, decreasing the economic potential of such projects and limiting the interest of foreign investors.

The cost effectiveness of CHP plants depends very much on local conditions, and it is therefore extremely important to make sure that there are good contracts in place with local heat and electricity customers.

Gas company Slovenskýplynárenský priemysel (SPP) reports that "the use of the cogeneration unit solely for the production of heat is not cost-efficient [but] under certain circumstances, when combined with electricity production, it can be very lucrative."

An alternative to building large CHP plants is to build smaller ones or refurbish existing heating or power stations aimed at the precise needs of local communities. One such project designed and managed by Energoprojekt Slovakia came online last year in southern Slovakia's Nové Zámky, and is currently the country's largest CHP plant with gas-fuelled piston engines.

CHP units were installed in the existing heating plant, providing 4.7 megawatts of electricity and 4.7 megawatts of heating power. Most of the electrical power is delivered to the national grid, while the heat produced in the plant provides hot water for local residents and businesses.

The total cost of the project was just Sk130 million (3.2 million euro), with an expected return on investment within eight years, Energoprojekt officials say.

But even this smaller project was only possible because 40 per cent of its funding came from the EU PHARE fund.

Insiders say there is much the government could do to encourage these more energy efficient and environmentally friendly power stations.

The government could increase the use of such power stations by guaranteeing loans, attracting foreign investors, or by changing the rules limiting profit in the electricity and heating sector. Such ministerial help was instrumental last year in gaining international funding for the development of a biomass cogeneration plant near the central Slovak town of Banská Bystrica last year.

Another alternative would be for the government to change legislation concerning the way profit is calculated for energy companies.

"The legislation concerning the fixing of the price of heating is based on the principle of due costs and adequate profit. This principle is considered to be out of date and, in addition, it does not motivate the heat producer to make any effort for cost savings. In fact it works the opposite way: In order to achieve a higher profit, as much cost as possible needs to be shown," said Vojtech Červenka of energy company Dalika.

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